APLE Q2 2024: New York $82M Litigation Risk Clouds Results
- Robust Acquisition Pipeline: Management highlighted that they are underwriting as many deals as ever, with a strong pipeline of potential acquisitions and assets available at attractive prices, which supports long‐term portfolio growth.
- Disciplined Capital Allocation: The team continues to execute share repurchases and remains flexible in balancing acquisitions versus buybacks, indicating that they view their stock as undervalued and are well‐positioned to deploy capital effectively.
- Resilient Operational Performance: Despite some rate softness, occupancy remains strong with improving midweek performance and a gradual shift toward more business travel, which enhances margins and supports sustainable earnings growth.
- Rate & Margin Pressure: Management noted that current hotel rates, especially midweek, remain significantly below 2019 spreads, with evolving mix shifts and leisure price sensitivity leading to softening ADR growth that could pressure margins over time.
- Asset-Specific Risks: The New York property presents notable concerns, as LuxUrban has failed to make timely payments and faces litigation for approximately $82 million in damages, potentially resulting in prolonged transition costs and negative cash flow impacts.
- Capital Deployment Uncertainty: The Q&A revealed uncertainty in balancing acquisitions with share buybacks amid a volatile market environment where attractive asset pricing remains elusive. This could hinder the company’s ability to drive EBITDA growth and NAV expansion if market movements continue unfavorably.
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Acquisition Pipeline
Q: What is your current acquisitions pipeline?
A: Management stated they have underwritten billions in assets and remain poised to proceed with strategic acquisitions when market conditions and refinancing opportunities are favorable. -
Capital Allocation
Q: How are you deploying capital?
A: They prioritize EBITDA growth by balancing acquisitions, share repurchases, and reinvestments to achieve the best return in current market conditions. -
Rate Normalization
Q: How do current rates compare to 2019?
A: Executives explained that while the midweek premium gap has shrunk relative to pre-pandemic levels, it still stays above pre-COVID levels, albeit not fully normalized to 2019 spreads. -
Margin Outlook
Q: Can margins stabilize to pre-COVID levels?
A: Management expects margin stabilization as expense growth moderates and the shift in business mix leads to lower costs, potentially approaching pre-COVID profiles. -
New Construction
Q: Are fixed-price new constructions attractive?
A: Leadership sees strong opportunities in fixed-price deals despite rising costs, highlighting acquisitions like the Madison Embassy as proof of attractive pricing. -
Acquisition Timing
Q: Will the share price impact acquisition timing?
A: They remain cautious—current share pullbacks signal potential but don’t prompt immediate deal acceleration, as acquisition timing is driven by overall market dynamics. -
Dividend Stability
Q: Any plans to adjust the dividend?
A: Management confirmed they will maintain the $0.08 monthly dividend, as the current payout is well-supported by performance. -
Rate & Mix
Q: What drives midweek ADR improvements?
A: The team expects further midweek rate increases due to a shift towards more business travel, with booking trends remaining resilient despite economic softness. -
Guidance Revision
Q: What drove your revised guidance?
A: They attributed the revision primarily to softer leisure rate growth and a stronger focus on midweek performance affecting ADR expectations. -
Monthly Trends
Q: How did performance vary monthly?
A: Management noted a strong start in April that tapered later due to rate pullbacks impacted by holiday effects, influencing the overall quarterly performance. -
Weekday Mix
Q: Has weekday business travel improved?
A: They observed robust weekday occupancy gains driven by both small/medium and larger corporate accounts, enhancing overall performance. -
Holiday Impact
Q: How did holidays affect demand?
A: Executives mentioned that holidays like the 4th of July and Juneteenth led to temporary softness in rates, though overall demand and occupancy remained strong. -
NY Property Issue
Q: What is the status of the New York property?
A: They are actively addressing delayed payments and legal challenges on the property with a conservative approach to timing and transition costs. -
Portfolio Mix
Q: How do top versus lower-end properties perform?
A: Management emphasized that performance is driven by market conditions rather than asset class, with top-end properties benefiting from stronger local fundamentals. -
Channel Mix
Q: Did OTA channels outperform expectations?
A: Channel performance was in line with projections, with OTA contributions matching expectations during a strong leisure quarter. -
Market Mix TN/NC
Q: How are Tennessee and North Carolina markets faring?
A: They cited challenges with rate issues in Tennessee and softer performance in parts of North Carolina reflecting localized market concerns. -
Contract Structure
Q: Would a percentage off bar improve contract outcomes?
A: Executives did not find it necessary to reanalyze structures, maintaining current fixed contract methods without a change to percentage-based discounts. -
Buyback Consistency
Q: Will buybacks increase with current share pullbacks?
A: While the share price pullback is attractive, the decision on buybacks remains contingent on market dynamics and overall asset pricing.
Research analysts covering Apple Hospitality REIT.